What is net asset value (NAV)?
Net asset value (NAV) refers to the net value of an entity or stock determined by deducting the liability’s total value from the asset’s total value. It’s generally associated with the market value per share or unit of securities, such as mutual funds, exchange-traded funds (ETFs), hedge funds, or indexes on a certain day.
For companies, net assets mean the difference between assets and liabilities. Net asset value refers to the fund valuation obtained by dividing the difference between assets and liabilities by the number of shares investors hold.
NAV is a key metric investors look into to understand the value of company shares and predict future valuation and growth.
Many organizations use enterprise asset management software to track the lifecycle of assets owned by them. It empowers organizations to optimize asset performance, usage, and maintenance costs.
Benefits of net asset value
Net asset value helps organizations assess and evaluate an investment’s worth. It’s a critical tool for investors and promotes transparency, helps decision making, and effective portfolio management. Below are some of the standard benefits of net asset value:
- Transparency. NAV offers investors a simple, uniform way to determine the worth of their investment in a fund. It aids investors in tracking value changes over time and understanding the value of their holdings.
- Assessment. NAV gives investors the ability to calculate the fair value of their investment. Investors can examine the price at which shares are acquired or sold and determine if they are purchasing at a premium or discount to a fund's underlying assets by calculating the NAV per share.
- Decision making. Investors use NAV as a point of reference when making investing decisions. Investors can determine which funds offer greater value or correspond with their investing goals by comparing the NAV of various funds. It helps investors make educated choices on the purchase, sale, or flip of their investments.
- Monitoring cost. NAV includes the costs and charges related to running the fund. Investors can evaluate the effect of expenses on the overall performance of the fund by looking at NAV. It enables investors to assess the fund's cost efficiency and take expense ratios into account when selecting investment options.
- Diverse portfolio. NAV makes it possible for investors to distribute their capital among many funds that use various investing methods or asset classes, enabling portfolio diversification. Investors can build a diversified portfolio that fits their risk appetite and investing objectives by comparing NAV.
- Benchmarking. Investors can assess the performance of their investment using NAV as a benchmark. They can determine whether a fund has excelled or underperformed its peers or the overall market by comparing the NAV of the fund with a pertinent benchmark index or peer group.
Components of net asset value
Net asset value is often close to or equal to the book value of a business. It is used in mutual funds, real estate investments, and oil and reserve companies. Two main components are critical in determining the net asset value.
- Asset: The market value of the investments, cash on hand, cash equivalents, and other income are all assets. These are incorporated in various ways, such as a proportion of capital in the form of cash and liquid assets, as well as other things like interest and dividend payments.
- Liability: The liabilities include unpaid bills, money owed to the lenders, and other fees owed to related organizations. In addition, mutual funds have other foreign liabilities, such as shares for non-residents, unpaid invoices to foreign companies, and other unspent sale revenue.
Net asset value calculation
Below is a formula for calculating the net asset value of an entity
Net asset value = (Assets - Liabilities) / Number of outstanding shares
The calculation is divided into these steps:
- Determine the asset value. Asset value includes the fund’s holdings, stocks, bonds, cash equivalents, and other investments. A security's worth is usually determined by its market price. This may be the closing price from the appropriate market for publicly traded securities. Each security's contribution to the overall asset value is calculated by multiplying its value by the number of shares or units the fund holds. Add the value of all assets to determine the total asset value.
- Calculate the liabilities. Liabilities are the debt or obligations of an entity. This may cover management fees, office overhead, legal fees, and other operational costs. Add all liabilities to get the total liability value.
- Divide the net value of assets. Calculate net assets by subtracting the total value of liabilities from the total value of assets. Divide it by the total number of shares investors hold or are there in a fund. This is the value an investor would get by liquidating one share.
Net asset value vs. gross asset value
Net asset value is the current value of all assets minus any liabilities divided by total outstanding shares. NAV normally operates on a per-share basis, displaying the market value of each share. Investors monitor NAV to make an informed decision on whether or invest in an entity or not.
Gross asset value (GAV) is the current value of all assets held inside a property fund. It doesn’t cover acquisition or setup expenditures but does include equity and debt positions. GAV can also be considered the market value of all the assets in a fund.
Learn more about accumulated depreciation to calculate the reduction in a company’s asset value from acquisition to the present date.
Sagar Joshi
Sagar Joshi is a former content marketing specialist at G2 in India. He is an engineer with a keen interest in data analytics and cybersecurity. He writes about topics related to them. You can find him reading books, learning a new language, or playing pool in his free time.
